Wednesday, August 10, 2011

This is what sideways feels like. We dive onto the banana slide in the back yard and tumble off the end into the grass. Our knees hurt and we don't go back to the line to do it again. Then the sting wears down, the water is spraying, everyone's having a good time, and we throw ourselves down onto the banana slide again... rinse repeat... rinse repeat...

I haven't posted in the past couple of days because... nothing... has... changed... Nothing. Nothing happened today that we couldn't see before today, and the same was true yesterday and the day before that, and the same will be true tomorrow and I bet the day after that. Nothing fundamental is changing right now. The only arguably fundamental thing that's changing right now is investor rationality. It's exceptionally low.

Buy the dips, sell the highs. It's like taking candy from a baby right now.

Here's a chart of housing inventory, courtesy the reporting companies and a post at http://www.calculatedriskblog.com from last year through this year -- notice what sideways looks like. Hint: sometimes it looks up, sometimes it looks down, but it's really just sideways. Expect this through 2013.

Monday, August 08, 2011

And S&P continues to soil itself in front of the world by sparking generalized fear that will be short-lived and guess what -- a flight to safety by investors into... wait for it... wait for it... United States debt!! That's what they just downgraded!!

That's right, the equity (stock) markets may be down, but investors are fleeing to the safety of United States debt. Mmm hmm...

10-Year Treasury yields are way down hovering below 2.4%. If our debt were such a "crisis," we would be seeing sharply higher rates since - according to S&P - our debt is not as safe. It seems the markets disagree strongly.

Sunday, August 07, 2011

It's Sunday evening and markets are open in Asia, futures are open too. Dow futures are hovering around -275 points (counting fair value) and has been holding and is now at 9:15 ET well off its lows. If markets dip tomorrow again, smart money buys.

No observer, no analyst, not even S&P has yet been able to explain a true fundamental economic reason that the U.S. - and not France or Germany or Finland per se... all AAA - deserves a credit downgrade over its AAA former peers. There is plenty of talk, however, of why we don't need "credit" rating agencies at all, particularly with records such as S&P and others. If these companies were paid on accuracy, they would have fallen along with Lehman. Read the report (see prior post for link). It is nakedly political (though not partisan) and not economic. It describes nothing that political analysts and prognosticators have been and are still saying. The short-term, medium-term, and long-term trends, including the political, have not changed. The debt debate was not the first time our government has played brinksmanship.

The world is selling off. Why? Because as George Soros points to again and again in his finance books, such as The Alchemy of Finance, the markets are a psychological game of expectations, namely game theory. It's not about the fundamentals now. It's about "what do I think that other people think?" Moreso, what do I think that other people think that other people think? And so on. With that, basic human psychology especially with greed and fear, you get ridiculous market fluctuations based nothing on fundamentals but almost entirely on the psychology of game theory. And that's not a way for savvy investors to play the market.

Answer? Pay attention to the fundamentals, corporate profits and balance sheets, comparative national economics, and solid apolitical indicators. The fundamentals investor will be buying these dips.

Really? Really. All of these countries have socialized medical care. And they still get AAA rating from S&P. Another thing most all of these countries have is a parliamentary system, in other words, no filibuster, and therefore true "majority rule." Gridlock not only is less likely, it's practically impossible since governing is by definition about forming 51% in government formation and in decisions. Again, no filibuster, no "pocket filibuster," no presumed filibuster or "holds" in the Senate requiring 60 votes on everything. Their fiscal battles are hard fought and the austerity measures being imposed in some of the Eurozone parliamentary countries including France are causing riots. But the work is getting done.

None of those countries have a "debt ceiling" law either. S&P, which are not political prognosticators and whose decision was primarily steeped in politics, cites mostly the political dynamics of The United States, not fundamental fiscal problems.

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. ...

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt...burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers...

In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging...
And lest you think S&P wants all spending cuts, witness:

It appears that for now, new revenues have dropped down on the menu of policy options.

What else? Oh, part of their downgrade reasoning is because they now believe that Congress and the President have indicated by their actions that they will not allow The Bush Tax Cuts for the super wealthy to expire, thereby limiting the potential for signicantly higher revenue opportunity in the nation's finances. Clearly S&P knows basic finance: that tax cuts do not help deficits.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

Finally, this basic Q&A about the situation from Reuters is something that both retail and advanced investors should review. Bottom line: while it brings some interesting analysis to the table, S&P made bad calculations, has lost all credibility as its function as a credit rating agency, and is now better suited to make commentary in the FT, WSJ, Reuters, Bloomberg and elsewhere as merely political prognosticators.

Friday, August 05, 2011

Smart investors don't give a flip about S&P. Why do we even have credit rating agencies? Must we really outsource our own thinking to some big company that overvalued the mortgage-backed securities that turned out to be worthless and led to the biggest recession since the Great Depression? Records show they didn't even understand what they were rating then. Why should we think it's any different now? I don't think we should. The 10-Year Treasury is at c. 2.5%. The world is begging The United States to borrow and invest in its economic recovery. This isn't Europe. We're strong. And S&P a) is that stupid or corrupt, or b) has been set up.

Thursday, August 04, 2011

Okay yeah I know what's going on today around the world and indicators etc. But there is no good fundamental reason for today's market sell-off. None. Nothing is different today substantially from yesterday or last week. Strong corporate earnings with generalized cautionary notes of total CYA for Q3, but still... Strong earnings. Corporate balance sheets with fat cash. 10-Yr Note at 2.46%. This is generalized fear with no basis. That equals opportunity.